Seeking clarity on managing subcontractors.

AuthorMeier, Luke
PositionGovernment Contracting Insights

A prime contractor is responsible for managing its subcontractors. That is an uncontroversial proposition any prime contractor would agree with, but there is little authority to clarify what exactly that management obligation entails.

Many prime contractors push down legal and contractual requirements to subcontractors at the outset and then, during performance, focus on vetting the subcontractor's work product. For the many compliance obligations that apply beyond the quality of the subcontractor's work, however--such as accurate timekeeping and appropriate labor category qualifications--prime contractors verify compliance simply by relying on the subcontractor's initial certification.

One thorny dilemma with these matters is that subcontractors are often sensitive to poaching, and unwilling to share information with the prime contractor that would reveal the identities, salaries and resumes of its personnel. Without this type of information, it is tremendously difficult for a prime contractor to independently verify its subcontractor's full compliance. Increasingly, government auditors and contract managers are insisting that prime contractors should obtain this information, review it and be prepared to establish the subcontractor's compliance in the event of an audit. Otherwise, they fail to fulfill their management role.

The notion that this type of information-gathering is required suffered a substantial blow in a recent decision by the Armed Services Board of Contract Appeals, which decisively rejected arguments from the Defense Contract Audit Agency and a contracting officer that a prime contractor's costs should be disallowed because the prime contractor could not produce detailed incurred cost information regarding its subcontractor's performance.

In Lockheed Martin Integrated Sys., Inc., ASBCA Nos. 59508, 59509, the board ruled on a government claim seeking more than $100 million from the company for allegedly breaching an obligation to manage subcontracts. The controversy began when an audit of three contracts led to DCAA questioning $ 103 million in subcontract costs.

DCAA claimed that, for the subcontract costs to be allowable, Lockheed Martin had to provide documents showing it had: reviewed subcontractor resumes to confirm personnel qualifications; reviewed subcontractor timesheets to confirm the accuracy of invoiced hours; and tried to obtain incurred cost submissions from its subcontractors--contacting "the Government" for...

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